This document provides background information on Costco and discusses their consideration of expanding their business model. It notes that as of 1998, Costco operated 278 warehouse clubs globally and had $21.5 billion in sales and $312 million in net income in 1997. It discusses their core operating philosophy of reducing costs through bulk purchasing. It also summarizes the pros and cons Costco saw in three potential expansion strategies: 1) launching an executive membership program, 2) increasing product diversification, and 3) expanding peripheral services. The document concludes that expanding peripheral services aligned best with Costco's operating philosophy while providing profitable growth opportunities.

1. Costco Companies, Inc.
Marketing 658
Frank Fisher

2. Background Information
• As of July 1998, Costco operated 278 members-only warehouse clubs in 24
states, the U.K., Mexico, Canada, and Asia.
• In 1997 Costco had a net income of $312 million on sales of $21.5 billion.
– 16 million member households.
– Earned $400 million in annual fees.
• For Costco, bigger was not only better but imperative. The only way to
continue to reduce costs was to move more people and products through its
building. Possible expansion opportunities included:
– Domestic
– International
– Product Diversification
– Different Formats

3. Background Information
• After P&G approached Costco with a proposal to purchase their customer
membership data Costco decided to leverage their list of loyal members by
offering a natural market for anything that required the purchaser to trust the
supplier.
• In response to member requests, Costco developed a portfolio of services by
creating a new “Executive” membership program, for a $100 annual fee:

4. Background Information
“Was the company straying too far from its core
competency?
“As a company, we’ve never
really had to market before”
– Pat Turpin (VP of Executive Member
Services)

5. How does Costco market its new Executive
Membership Services program?
Critical Issue

6. Does Costco expand outside of its core
competency to attract new customers?
Critical Issue

7. Critical Issue

8. Case Contradictions
 Costco’s core operating philosophy was based upon “taking costs out of
the supply chain,” as a result, Costco preferred to do operations by itself.
“We don’t make good partners.” –Jim Sinegal (CEO)
• Salmon & Tyson Foods: Costco worked with the suppliers to improve
supply chain logistics, all the while bringing price down by buying in
bulk.
• Entering the Service industry (Auto, Home, Mortgage…)
 Qualifying for a Costco membership was not difficult, requiring only
evidence of a steady job and payment of $35 for a business, $40 for a
member of the public  minimal barrier
• Costco believed that 75% of its members would qualify for the
services (insurance, auto, home), since Costco’s 16 million members
were already pre-screened for income and other qualifying variables.

9. Case Contradictions
 Costco’s 16 million household members might not experience the same
consistent savings that other members would (accident histories,
telephone usage patterns, credit card acceptance rates).
• Contradicts 1st core operating philosophy to be “efficient and
simplistic”
“We aren’t MBAs so we don’t do
complicated things.”

10. Operating Expenses Breakdown
Coupon Book Statistics, etc…
Survey Feedback & Questions
Membership Breakdown & Demographic info.
4
3
2
1
Missing Case Facts

11. Personal Insight
 Rapid Inventory Turnover
 High Sales Volume
 Reduced Operating Costs
Proven Operating Philosophy Value-Added Services
 “Out-of-the-box”
 No Savings Consistency
 Increase Customer Acquisition?

12. Kotler Text Teachings
• Do the Services distort Costco’s value proposition?
• Retention Dynamics:
– Will the new Executive Membership reduce the rate of customer defection?
– Or Increase the longevity of the customer relationships?
– Is this focusing a disproportionate effort on high-profit customers?
• Do the Services align with Costco’s core competency?
• Will this damage Costco’s brand equity?
Identity Meaning Response Relationships

13. #1 Launch Executive Membership
Program
1 Increased “Value” of Costco membership experience.
2 Memory of “Bad Service” could potentially decrease customer
retention.
2 Increased membership fee.
3 Revenue diversification.
1 Services are misaligned with core competency.
3 Increased SGA expenses (advertising).
PROSCONS

14. #2 Increase Product Diversification
1 Continue to act as buying agent for its members.
2 Broadening assortment to compete could negatively impact its
core competency of “intellgent loss of sales.”
2 Consistent with core competency: efficient & simple.
3 Continue to drive product costs down through volume purchases.
1 Reduce inventory turnover.
3 Increased distribution costs.
PROSCONS

15. #3 Expand Peripheral Services
1 Currently a $1 billion business for Costco in 1997 with profitable
growth opportunity & minimal impact to SGA expenses.
2 Reduced sales floor.
2 Controlled service experience for the customer (Costco ran
operations itself).
3 No negative impact to operating philosophy.
1 Limited to scale economy services & products.
3 Increased number of employees & overhead costs.
PROSCONS

16. Costco Solution
Expand Peripheral Services!

17. Costco Solution
“The only purpose for Costco in having the
Executive membership is to make it more
attractive for people to come to the
warehouse and buy from us.”
-Galanti (CFO)